FIXED ASSET CAPITALIZATION POLICY OF UBL

AGENDA

AGENDA
Introduction of United Bank Limited (UBL) Technical Terms & Definitions Objectives & Scope of This Policy Classification of Fixed Assets Capitalization Limit Matrix Initial Recognition of The Asset Measurement After Initial Recognition Depreciation Impairment Derecognition\Disposal

INTRODUCTION

INTRODUCTION
 United Bank Limited (UBL) is a banking company, which is engaged in commercial banking, retail banking and related services domestically and overseas.  UBL is the second largest private commercial bank in Pakistan with over 1000 branches and has an international presence in 10 countries.  It was incorporated in 1959 and is a private bank in the following shares: 1. Abu Dhabi Group, UAE (25.5%) 2. Best Way Group, UK (25.5%) 3. State Bank (48.69%) 4. Govt. of Pakistan (0.31%)

TECHNICAL TERMS & DEFINITIONS

TECHNICAL TERMS
 Fair Value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arms length transaction.  Residual Value is the estimated amount that an entity would obtain from disposal of an asset, after deducting the estimated cost of disposal, if the asset is already of the age and in the condition expected at the end of its useful life  Useful Life is the period over which an asset is expected to be available for use by the bank.  Property, Plant and Equipment are tangible items that are: 1. Held for use for administrative purposes or for rental for others (e.g. Ijarah); and 2. Expected to be used during more than one period.

OBJECTIVES & SCOPE OF FIXED ASSET CAPITALIZATION POLICY

OBJECTIVES & SCOPE

 Operating fixed asset policy is being framed to stream line and bring in consistency in recording and maintaining tangible and intangible asset throughout the network.  In formulating this policy, the instruction and guidelines given in the following standards are followed by the UBL Bank: 1. International Accounting Standards (IAS), 2. International Financial Reporting Standards (IFRS), 3. Banking Ordinance 1962, 4. Companies Ordinance 1984, and 5. Instructions issued by State Bank of Pakistan.

OBJECTIVES & SCOPE

 The objective of the policy is to provide a uniform set of guidelines on the capitalization, carrying values, depreciation and disposal of the operating fixed assets of the bank.  The guidelines outlined in this policy manual will be applicable to all branches, regional offices and divisions at banks head office in Pakistan.

CLASSIFICATION OF FIXED ASSETS

CLASSIFICATION OF FIXED ASSETS

CAPITAL EQUIPMENT CATEGORY USEFUL LIFE RESIDUAL VALUE DEPRECIATION RATE Percentage 5% 5% 10% Years Tangible Immovable Assets 20 Lease term 20 10 Tangible Movable Assets Furniture and fixtures: Carpets, curtains & library books Others Electrical, Office and IT Equipment Laptops Smart phones Telecom and other IT hardware Electrical and office equipment Vehicles Own use of the bank Given on lease (Ijarah) 4 10 25% 10%

Freehold land Building on freehold land Lease hold land Building on leasehold land Improvement on leasehold building

3 3 4 5 5

10% 10% Security deposit

33% 33% 25% 20% 20% Period of contract 10% 25%

Core banking solution All other software

Intangible Assets 10 4

CAPITALIZATION LIMIT MATRIX

CAPITALIZATION LIMIT MATRIX

Asset Category
Fixed & fixtures Chairs All other Electrical, office and IT equipment Printer and scanners Cabling (data, power and voice) All other Vehicles Own use of bank Given on lease (Ijarah) Software

Rupees

5,000 10,000

5,000 20,000 10,000

15,000 Actual 10,000

INITIAL RECOGNITION OF A FIXED ASSET

INITIAL RECOGNITION OF AN ASSET

 An asset will be recognized as an fixed asset only when it meets the following criteria:
1. If it is held for use in banks operation or for rental for others e.g. Ijarah etc., 2. Has life of more than one year, 3. Is over the capitalization limit matrix, 4. It is probable that the future economic, benefits will flow to the entity, and 5. The cost of the asset can be measured reliability.  Any item falling outside these criteria / limit will be expense out.

INITIAL RECOGNITION OF AN ASSET

 The cost of an item of property, plant and equipment comprises:
1. Purchase price, including import duties and applicable taxes after deducting any trade discounts, rebates and refundable taxes, 2. Any cost directly attributable to bring the asset to the location and condition necessary for it to be capable of operating in the manner intended by the banks management, 3. Professional fees on acquisition e.g. architects and engineers fee, 4. Cost of construction, 5. Cost of site preparation, 6. Installation and assembly cost, and 7. Costs of testing.

INITIAL RECOGNITION OF AN ASSET

 Subsequent Expenditure:
1. Any expense in the nature of repairs and maintenance does not qualify for capitalization. 2. Any other expense does not meet the criteria for capitalization and have an immaterial amount also does not qualify for capitalization.

MEASUREMENT AFTER INITIAL RECOGNITION

MEASUREMENT AFTER INITIAL RECOGNITION

 According to IFRSs there are two models which an entity shall use as its accounting policy: 1. Cost Model 2. Revaluation Model  UBL follows Revaluation Model, which states that, after recognition of an asset, an item of property plant and equipment whose fair value can be measured reliable shall be carried at a revalued amount.  Fair value at the date of revaluation less (-) any subsequent accumulated depreciation and subsequent accumulated impairment losses.

MEASUREMENT AFTER INITIAL RECOGNITION

 UBL revalued there fixed assets once in every three years or when there are reasons or indications that the carrying amount differs significantly from the fair value of the asset, revaluation will be carried out.  If any category of the operating fixed assets is revalued, the entire assets falling in that category will be revalued.  Any increase in the value of the asset as a result of a revaluation will be recognized and accumulated in the equity under the heading Revaluation Surplus  Any decrease in the value of the asset as a result of a revaluation will be recognized in the profit and loss as an Impairment Loss.

DEPRECIATION

DEPRECIATION
 UBL depreciate the amount of an asset on straight line basis over the useful life of an asset.  Depreciation on addition is to be charged in the month of addition and no depreciation is charged on the month of disposal.  Useful life is to be reviewed periodically and, if the remaining expected life differs significantly from previous estimate, the depreciation rate is to be adjusted to account for change in expectation.

DEPRECIATION
 The depreciation method applied to an asset shall be reviewed at least at each financial yearend and, if there has been a significant change in the expected pattern of consumption of the future economic benefits embodied in the asset, the method shall be changed to reflect the changed pattern.

IMPAIRMENT

IMPAIRMENT
 Impairment Loss is the amount when the carrying amount (Book Value) of an asset exceeds its recoverable amount (Market Value).  UBL assess at the end of each reporting period whether there is any indication that an asset may be impaired.  If any such indication exists, the entity shall estimate the recoverable amount of the asset and immediately record the impairment loss.

IMPAIRMENT
 In Assessing whether there is any indication that an asset may be impaired, UBL consider the following indication from external sources: 1. Fluctuations in assets market value during the period. 2. Significant changes with adverse effects on the bank in the technological, market, economic or legal environment in which the entity operates. 3. Fluctuations in the market interest rates or other market rates of return on investments.

IMPAIRMENT
 In Assessing whether there is any indication that an asset may be impaired, UBL consider the following indication from internal sources: 1. Any obsolescence or damage of an asset 2. Any evidence from the internal reporting that the economic performance of an asset will be worse than expected. 3. Significant changes with adverse effects on the bank, e.g. asset becoming idle, plans to discontinue as asset, reassessing the useful life of an asset as finite rather than infinite.

DERECOGNITION

DERECOGNITION
 The carrying amount of an item of property, plant and equipment shall be derecognized: 1. On disposal\sale; or 2. When no future economic benefits are expected from its use or disposal.  The gain or loss arising from the derecognition of an item of fixed asset shall be determined as the difference between the net disposal proceeds and the carrying amount of the item.  The gain or loss arising from the derecognition of an item of property, plant and equipment shall be included in the profit and loss when the item is derecognized.

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